For the Economics Professors

[snjmom]

Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I'll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.

But it doesn't hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status.

snip

You just don't have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.

So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn't have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.

The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment.

investment-consumption




Thoughts?

 

[auditor0007]

Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I'll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.

But it doesn't hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status.

snip

You just don't have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.

So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn't have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.

The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment.

investment-consumption




Thoughts?

I don't think most here will get it, or they will just deny it, but yea, it really does make quite a bit of sense. This is why when tax rates were much higher, nobody ever paid those rates, but they didn't go out and spend the money on consumer goods either, they reinvested it into capital goods that gave them an opportunity to earn even more.

 

[snjmom]

To be fair, some did, boxing great Joe Louis as a shining example. It's one of those things where you have to compare the reality vs the theory and then tweak the thesis where it just doesn't fit.